Electrons fly as Yahoo, Icahn exchange unpleasantries

Investor Carl Icahn and the Yahoo board are engaging in a war of words over …

The actions taken by Yahoo's management when faced with a buyout bid from Microsoft have attracted both a lawsuit and the attention of investor Carl Icahn, famed for his ability to launch proxy fights and compel mergers. Now, the two approaches are being united, as Icahn has published a series of open letters to Yahoo's board in which he repeats many of the accusations made in the lawsuit. Yahoo has responded with letters of its own, signaling a war of words that may continue until the company's shareholders meet in August and determine the fate of the existing board.

Icahn has placed a lot of money where his mouth is. Although he owned no shares of Yahoo as recently as April, he now holds over four percent of the company's outstanding shares. As such, he has a pretty clear interest in seeing the company either perform well enough to raise its stock price, or receive a buyout offer at a substantial premium over its current price. Icahn views the current management, which has overseen a decline in the company's fortunes and rejected Microsoft's buyout offer, a barrier to either of these happening.

As such, he's hoping to have the entire management team, from Jerry Yang to the board, replaced. To accomplish this, Icahn has launched a proxy fight, in which he intends to convince a majority of his fellow shareholders to vote for a slate of board candidates of his choosing, rather than those put forward by Yahoo (Jerry Yang has explained this process in an e-mail to his employees). Icahn's approach to the problem of convincing shareholders of the need for wholesale change is simple: make the existing management look incompetent. To that end, he's started publishing a series of open letters to the chairman of Yahoo's board, voicing a litany of complaints about the company's management. Yahoo, recognizing the stakes, has replied to each.

Icahn started the war of words with a letter, dated June 4th, in which he reiterated many of the accusations made in the shareholder lawsuit. In it, he states, "I and many of your shareholders believe that the only way to salvage Yahoo in the long if not short run is to merge with Microsoft." Arguing that Redmond will never trust the existing management, he calls for Yang and the board to be replaced, and several steps be taken to remove the impediments to the deal that they had put in place.

Yahoo responded almost immediately, calling the accusations from the lawsuit, "a series of unsubstantiated allegations from a complaint filed in a Delaware court which grossly misstate the very clear record and position established by the Yahoo! Board." The letter argues that the employee compensation plans Icahn termed a "poison pill" are necessary to attract and retain talented staff at a time of uncertainty, and claims that they thoroughly explored possible deals with Microsoft.

Icahn fired back two days later, repeating the accusations and again calling for Yahoo to take actions that smooth the road for a Microsoft buyout. He also made some less general suggestions, including modeling Yang's replacement on Google's hire of Eric Schmidt and suggesting a search deal with Google. Yahoo again had a same-day response, essentially saying that Icahn's vague generalities in no way represented an actual plan for running Yahoo should his proxy fight succeed. Icahn fired off yet another letter this morning, stating, "I cannot help but wonder if you even read my letter," and reiterating many of its points just in case.

It's clear that neither party is really interested in listening to others. Icahn is playing to his fellow shareholders, and is probably more interested in replacing the people he's writing to than gaining their cooperation. Yahoo's management is hoping that they can undercut his accusations sufficiently to continue with whatever course of action they have planned. As it's a battle for public opinion, we can expect continued salvoes of letters to be fired as we move closer to Yahoo's shareholder meeting in August; I'd be surprised if a Yahoo letter is not released later this afternoon.